The scandal that recently enveloped Wells Fargo teaches an important lesson about running an ethical business. And Wells Fargo was trying to run an ethical business, despite its huge blunder. For example, Well Fargo avoided many of the pitfalls and risky investments that plagued other big banks in 2008/2009.

Here is what happened. Several years ago Wells Fargo decided it was not doing enough cross-selling, Cross-selling means getting customers who use one service, such as checking, to use other services, such as savings or credit cards. There is nothing wrong with cross-selling – all banks do it. Wells Fargo developed a specific strategy to encourage cross-selling, which was to involve its employees in telling customers about other products and services.

In order to encourage employees to support the program, Wells Fargo employed the time honored strategy of providing incentives to employees who succeeded at cross-selling. This is where everything went wrong. Employees not only responded to these incentives by cross-selling, they manufactured fake accounts in the names of existing Well Fargo customers. Some customers figured this out, but many didn’t and ended up paying fees on accounts they didn’t even know they had. The problem was huge. In attempting to correct the problem the company fired 5,300 employees and lost its highly respected CEO, John Stumpf.

Well Fargo made a number of mistakes including not publicly acknowledging the problem soon enough and not having adequate controls to detect the fake accounts. But what is unique about this problem is that so many employees were involved in the wrong doing. Unlike many corporate crises, this was not one or two rogue executives in an otherwise healthy organization. This was plain wrong-doing on a massive scale.

The Wells Fargo mess teaches a clear lesson which is that you get what you pay for. Specifically, you can talk yourself blue in the face about ethics, as many Wells Fargo managers did, but you can not send employees a clearer signal than their paycheck.

The first reason this is important is that when organizations think about creating an ethical culture, they almost always ignore the organization’s reward system. They print codes of conduct, mandate training and establish ethics hotlines. But if you are rewarding the wrong things, you will get the wrong behaviors. This is as true of the clerk at your local branch bank as it is of the top levels of an investment bank. Organizations signal what they really care about through their reward systems. Remember that the one corporate document every employee reads is their paycheck.

The importance of this lesson goes well beyond ethics. An army of management consultants is advising businesses that they can get more out of their employees if they adopt one or another reward strategy instead of pay for performance. The idea is that you can get better performance out of employees if you abandon pay for performance in favor of one or another strategy that rewards “the whole person” and not just the paycheck. The peak of this phenomenon is called holocracy, a veritable tangle of cross cutting evaluations and peer-enforced group-think.

The Wells Fargo case shows once again the power of pay for performance. Unfortunately, it also showed the power of pay for performance when you pay for the wrong performance. The performance systems of most organizations are the jealously guarded hostages of fortress HR. Executives who want to run truly ethical – and effective – organizations need to tear down the walls of this fortress before engaging in silly talk about the greater good. You will have a lot better chance of avoiding the sort of ethics crisis that Wells Fargo has undergone if you take charge of your organization’s reward system. You cannot leave your organization’s greatest source of influence on its employees in the hands of the organization’s bureaucracy.

Suppose your organization understands the reputational and legal risks of unethical conduct — yet, the organization has no strategy to ensure that its employees support ethical conduct. Sure, there is a code of conduct, but that’s not a strategy. Organizations who want their employees to stay at the cutting edge of technology have a strategy to attract and develop such employees. Why is it, then, that organizations do little more than hope that their employees will do the right thing? Over the forthcoming series of posts we will explore three ways in which an organization can develop a practical strategy for improving the ethics of an organization.

I was recently asked to review a book titled Negotiating the Impossible by Deepak Malhotra, who is a Harvard Business School professor. Given the bragadoci0us title and the worn out topic, I expected the worst. I am happy to say that this is a terrific book, full of good advice and fun to read – especially the historical examples of critical negotiations. I do recommend having a look at this one.

There are many ideas about the factors that contribute to the ethics of an organization. These ideas range from ethical leadership to a concern for stakeholders to having a mission beyond economic success. While these ideas seem plausible, there is little evidence to support them. More importantly, there is often little you can do to affect these factors. A company that makes coat hangers is limited in the extent to which it can make its mission inspiring.

So a team of researchers set out to isolate actionable factors that contribute to an organization’s ethics. Their research found three factors that any organization can use to improve its ethics.

The first factor is a work culture in which employees are never retaliated against for reporting concerns. Many studies show that organizations in which employees report errors do better on quality measures and our research supports this. Employees in all organizations fear retaliation to some extent, especially when reporting on their managers. This fear of speaking up allowed unethical practices to persist at GM and Volkswagen even when many employees knew better. Ethical organizations don’t pretend that fear of retaliation does not exist but instead work to create a culture in which retaliation is not tolerated and reporting is expected. More to follow.

Is there still a point to having in-person, flesh-and-blood meetings? Is there a point to such meetings when we can see and hear a person in another part of the country/world as if they were seated across from us? Is the belief that being there in-person still matters just a pre-technological bias that will pass as technology makes remote communication even more accessible? My work in ethics tells me that there is a point to in-person meetings – and we can put our finger on just what this point is. I explain this in the Huffington Post at http://www.huffingtonpost.com/mark-pastin/up-close-and-personal-why_b_9394572.html .

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While there will continue to be new posts on longer topics on ethicswhisperer.com, I also encourage you to follow markpastin.com, which is updated more frequently and focuses on issues of the day. Of course, your comments are always welcome on any of our sites.

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